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IBM Profits Beat - Revenue Light

April 17, 2019

IBM reported first-quarter results. IBM’s revenue fell by 4.7 percent to $18.18 billion, which was less than the expected $18.46 billion. Net income came in at $1.59 billion, or $1.78 per share, compared with $1.68 billion, or $1.81 per share, last year. Not counting certain items, IBM earned $2.25 per share with expectations set at $2.22 per share.

"In the first quarter, our cloud revenue growth accelerated, and we again grew in key, high-value areas in Cloud and Cognitive Software and in consulting,” said Ginni Rometty, IBM chairman, president and chief executive officer. "IBM’s investments in innovative technologies coupled with our industry expertise and our commitment to trust and security position us well to help clients move to chapter two of their digital reinvention."

"Our results reflect the fundamental changes we have made to our business, allowing us to generate greater operating leverage. In the first quarter, we significantly expanded profit margins, led by our services businesses," said James Kavanaugh, IBM senior vice president and chief financial officer. "Our focus on prioritizing our investments in the emerging high-value segments of our industry has enabled us to drive higher profitability and strong cash generation."

Cash Flow and Balance Sheet

In the first quarter, the company generated net cash from operating activities of $4.8 billion, or $2.3 billion, excluding Global Financing receivables.  IBM’s free cash flow was $1.7 billion.  IBM returned $2.3 billion to shareholders through $1.4 billion in dividends and $0.9 billion in gross share repurchases.  At the end of March 2019, IBM had $2.4 billion remaining in the current share repurchase authorization.

IBM ended the first quarter with $18.1 billion of cash on hand.  Debt totaled $50.0 billion, including Global Financing debt of $29.5 billion.  The balance sheet remains strong and is well positioned for the long term.

Segment Results for First Quarter

  • Cloud & Cognitive Software (includes cloud and data platforms, cognitive applications and transaction processing platforms) -- revenues of $5.0 billion, down 2 percent (up 2 percent adjusting for currency), led by cognitive applications, up 2 percent (up 4 percent adjusting for currency), and by cloud and data platforms, down 2 percent (up 2 percent adjusting for currency).
  • Global Business Services (includes consulting, application management and global process services) -- revenues of $4.1 billion, flat year to year (up 4 percent adjusting for currency), with growth in consulting and global process services.  Gross profit margin increased 280 basis points.
  • Global Technology Services (includes infrastructure and cloud services and technology support services) -- revenues of $6.9 billion, down 7 percent (down 3 percent adjusting for currency), with growth in hybrid cloud revenue.  Gross profit margin increased 110 basis points.
  • Systems (includes systems hardware and operating systems software) -- revenues of $1.3 billion, down 11 percent (down 9 percent adjusting for currency), with growth in Power, offset by the impact of the IBM Z product cycle dynamics and weakness in Storage.
  • Global Financing (includes financing and used equipment sales) -- revenues of $406 million, flat year to year (up 4 percent adjusting for currency).

Full-Year 2019 Expectations

The company continues to expect GAAP diluted earnings per share of at least $12.45, and operating (non-GAAP) diluted earnings per share of at least $13.90.  Operating (non-GAAP) diluted earnings per share exclude $1.45 per share of charges for: amortization of purchased intangible assets and other acquisition-related charges, including pre-closing charges, such as financing costs, associated with the Red Hat acquisition; retirement-related charges; and tax reform enactment impacts.

Investors were expecting  diluted earnings per share guidance of $13.91 per share.

IBM continues to expect free cash flow of approximately $12 billion, with a realization rate of approximately 100 percent of GAAP Net Income.

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